3 Things You Should Know About Title Loans

You should be extra careful when you decide to take a title loan and determine if it is worth the risks.

Many people use title loans when they want to get their hands on some money as fast as possible. They may need this money to pay the rent or a utility bill or something a lot more expensive, which they have to pay right away. To get this amount of cash fast, people go to lenders who charge them a hefty interest. You should be extra careful when you decide to take a title loan and determine if it is worth the risks. Here are three things you should know before taking a title loan.

1. You Need to Have Equity in a Vehicle

A title loan is a short-term loan that lasts from two weeks to a maximum of one month. You have to keep some sort of asset as collateral like a car or vehicle of some sort. The loan can be about 50% of the collateral’s value. It is commonly known as a car title loan, but you can use any vehicle as collateral like a motorcycle or a truck. You will have to own a car or have equity in it to qualify for a car title loan.

The lender takes the title of your vehicle as collateral until you repay your loan with interest. Some lenders prefer if you have full ownership of the car but others will accept if you have nearly completed all of its installments. You will need to submit proof of insurance along with a photo ID. Lenders would usually want to see the vehicle to determine its value and that it is in good shape before loaning you the agreed amount of money. Some lenders may ask you for a copy of your car keys.

Before you sign the loan agreement, there are a few things to keep in mind. First, the lender is required by law to determine the interest rates and total cost of the loan in writing. This includes the amount you need to pay for the loan in dollars and the annual percentage rate. This rate is determined depending on the amount of money you borrowed, additional fees like document and processing fees, the monthly charge on the loan in dollars, and the duration of the loan. Compare this rate with different lenders to determine which one to choose.

Make sure to go over the different fees included in the agreement like returned check fees or late fees. It’s also wise to check with your lawyer about the loan laws in your state because it may be a little different from one location to the other. Some laws in certain states protect the borrower from expensive interest rates, so make sure to get acquainted with local laws to know your rights moving forward.

2. Most Lenders Enforce an Extremely High-Interest Rate

There are many advantages to getting a car title loan. First of all, you won’t be required to provide a credit check. You can go now to a lender and apply for a title loan without needing any paperwork. It is the fastest way to borrow money in case of emergencies or if you tried all the alternatives you can think of and couldn’t come up with the money you need. Since you don’t need to provide a credit check, the whole process goes a lot faster. All the lender needs to do is take a look at your car and go over your filled application. Depending on the amount of money, you can receive it on the spot or by two days’ time at the most.

All these advantages don’t come without downsides. The first downside is that you will be charged a ridiculously high-interest rate. Most lenders will charge you a 25% interest rate for every month you don’t pay the loan. Let’s clarify this with an example. Suppose you took a $2000 car loan with a 25% interest rate of $500. By the end of the first month, you will have to pay the lender back $2500. In addition to that, you will have to pay the fees that were stated in the loan agreement. If you calculate how much that costs per year, you will find that the interest rate is 300%, which is extremely high in comparison with a traditional bank loan. It even exceeds the interest rate of credit cards. This is why you must ask about the APR before you sign the agreement and compare that rate with different lenders.

3. You May End Up Losing Your Vehicle

This is the obvious risk of a car title loan, which many people end up with. If you can’t pay the loan with interest and all the additional fees in time, the lender can easily take possession of the car since they already hold the title in their hands. Another alternative that many lenders do is that they force you to take another loan. This process is called rolling over the loan, which makes you end up in more debt.

To clarify this process, let’s assume you took an initial loan of $1000 with a $250 interest rate. If you didn’t pay by the end of the month, the lender tells you to pay the interest and roll over the initial loan to a new one with another $250 interest rate. You will end up paying $500 interest instead of $250, which calculates to a 50% interest rate. The worst thing you could do is accept a roll-over because you will end up in a vicious loop with the lender and may never be able to pay them back. The last resort for the lender is to take possession of your car, which ultimately costs more than your initial loan.

You’ll need to consider all the pros and cons of taking a car title loan to find out if you can pay it back in time. This might be a good option if you are certain that you can pay the lender with interest in full without getting into the whole cycle of debt. Try to find other alternatives like a payday loan, applying for a personal loan and having someone with a good credit check co-sign it, or seeking help from family and friends. Make sure you try every option you have before signing a title loan agreement.

Tom Brown
Tom Brown is an automotive market enthusiast living in the United States. He holds a diverse background in automotive marketing and enjoys utilizing that to produce insights into the inner workings of the industry.